The 2013 Outlook for Tesco

LONDON -- In this festive mini-series, we look at the 2013 prospects for some of your favorite FTSE 100 shares. Today, it's the turn of Tesco  (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) .

Tesco's shares have fallen 15% during the course of 2012 compared with a 6% rise for the Footsie. Britain's biggest supermarket got its Christmas offer all wrong last year, and issued a profit warning in January. However, the company also acknowledged there were deeper problems with its U.K. stores.

In the hope of arresting five quarters of declining U.K. like-for-like sales, Tesco said it would abandon its aggressive margin expansion, scale back on racing for new store space, and invest 1 billion pounds in improving the shopping trip for customers by refurbishing existing stores and employing more staff.

In its half-year results announced in August, Tesco reported U.K. like-for-like sales up 0.1% in Q2 after a 1.5% decline in Q1. Earlier this month, though, the company said sales were back in decline in Q3 by 0.6%. However, Tesco claims that its main focus to date has been on the food business and reckons a 1.2% sales increase in Q3 for this part of its operations indicates the company is making good progress on its turnaround plan.

For me, the jury is still out on whether the 1 billion pound investment will be sufficient to get the U.K. back on track or whether Tesco will have to plow more cash into the business in 2013-14. The U.K. operation is likely to remain the focus of shareholders' attention in the coming year, which will begin with a Christmas trading statement on Jan. 10 before annual results are released in April.

Outside of the U.K., Tesco announced earlier this month that it would be conducting a strategic review of its loss-making U.S. business Fresh & Easy. It also announced the immediate departure of Fresh & Easy's boss, Tim Mason, a Tesco stalwart, who has been described as "a smart guy" by legendary investor and major Tesco shareholder Warren Buffett.

Tesco has said it will update on the progress of the strategic review in its annual results. However, while chief executive Philip Clarke said he will be considering "all options," the announcement of the review was widely interpreted by analysts and investors as meaning Tesco will be pulling out of the US.

An exit from the U.S. would perhaps be just as well, because parts of Tesco's growth engines in Central Europe and Asia have been looking a bit shaky of late and in need of management's time and attention.

I thought Tesco holding its latest interim dividend flat spoke more loudly than the chief executive's words, and I believe what the company does with this year's final in April will be a better guide than directorspeak to how the board views prospects for the rest of the year.

My view is that it could be a long haul for Tesco to regain its mojo. However, at a recent share price of 342 pence -- putting the company on a 12-month forward price-to-earnings ratio of 10.5 with a dividend yield of 4.5% -- many Foolish investors believe it will be worth the wait.

Furthermore, multi-billionaire Warren Buffett this year increased his holding in Tesco to 408 million shares -- or 5.1% of the company.

You can discover the price Buffett paid for his shares and decide for yourself whether Tesco is a blue chip bargain by helping yourself to a free and exclusive Motley Fool report. This report is available for a limited time only, but you can have it dispatched to your inbox immediately: Simply click here.

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